Market falls over 1.5% on fears of aggressive Fed hike

Benchmark equity indices snapped their three-day winning streak and lost over 1.5% on February 11 intraday after US consumer prices data came in hotter than expected.

On Thursday, RBI surprised markets by keeping policy rates unchanged on and decided to continue its accommodative stance in the backdrop of elevated inflation.

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Here are the key reasons behind today's market fall:

US CPI Inflation: Indian as well as global equity markets slumped after the US consumer prices data came in hotter than expected and subsequent comments from a Federal Reserve official raised fears the US central bank will hike rates aggressively to fight inflation.

US Labor Department data showed consumer prices surged 7.5% last month on a year-over-year basis, topping economists’ estimates of 7.3% and marking the biggest annual increase in inflation in 40 years.

Global markets fell further after St. Louis Federal Reserve Bank President James Bullard said the data had made him “dramatically” more hawkish. Bullard, a voting member of the Fed’s rate-setting committee this year, said he now wanted a full percentage point of interest rate hikes by July 1.

RBI Policy: Reserve Bank of India on Thursday maintained key policy rates steady on the backdrop of elevated inflation. Analysts think that managing inflation, rates, and currencies simultaneously will be difficult. The policy stance has been kept accommodative as the growth outlook is seen tentative given continuing slack on the demand side; private consumption is still lagging compared to the pre-pandemic levels.

According to JM Financial,  RBI is expected to increase the reverse repo rate by 100-110bp from Q2 2022 in response to the sustained rise in core inflation, currency depreciation and US rate hikes. Risk to inflation can come from crude oil prices rising above USD 100/bbl and resurgence in commodity prices, which will impel a strong Fed response.

Weakening Rupee: The domestic currency weakened to hit 75.38 a dollar on continued selling pressure by foreign investors. FIIs sold $4.45 billion in January and $1.17 billion in February. Between October and December, FIIs sold $5.12 billion in equities.

"We believe the RBI’s unexpected dovish stance with its focus on growth rather than inflation risk is a slight negative for the INR in the near term for the following reasons, including significant monetary policy divergence with other major central banks, concerns over the RBI’s FX stance, and the risk of the RBI being increasingly seen as lagging behind the inflation curve.", Nomura Research said in a note to investors.